AES Corporation — Fiscal 2019 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2019, with comparative results for 2018 and 2017. AES is a geographically diversified power generation and utility company operating through four strategic business units: US and Utilities, South America, MCAC, and Eurasia. The portfolio includes thermal generation, hydroelectric, wind, solar, energy storage, LNG infrastructure, transmission, distribution, and regulated utilities.
AES owned or operated approximately 30,471 MW of generation capacity and served approximately 2.5 million utility customers as of December 31, 2019. Approximately 68% of revenue was generated outside the United States.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $10.189 billion | $10.736 billion | Down 5% |
| Operating margin | $2.349 billion | $2.573 billion | Down 9% |
| Income from continuing operations | $477 million | $1.349 billion | Down 65% |
| Net income attributable to AES | $303 million | $1.203 billion | Down 75% |
| Diluted EPS from continuing operations | $0.45 | $1.48 | Down $1.03 |
| Adjusted EPS, non-GAAP | $1.36 | $1.24 | Up $0.12 |
| Net cash provided by operating activities | $2.466 billion | $2.343 billion | Up 5% |
| Capital expenditures | $2.405 billion | $2.121 billion | Up $284 million |
| Cash, cash equivalents and restricted cash | $1.572 billion | $2.003 billion | Down $431 million |
Operating margin was approximately 23.0% of revenue in 2019, compared with approximately 24.0% in 2018. The filing does not present a conventional consolidated net profit margin; net income attributable to AES was approximately 3.0% of revenue in 2019, compared with approximately 11.2% in 2018.
Segment performance
| Segment | 2019 revenue | 2019 operating margin | 2019 Adjusted PTC |
|---|---|---|---|
| US and Utilities | $4.058 billion | $754 million | $569 million |
| South America | $3.208 billion | $873 million | $504 million |
| MCAC | $1.882 billion | $487 million | $367 million |
| Eurasia | $1.047 billion | $188 million | $159 million |
- US and Utilities revenue declined 4%, but operating margin increased 3% and Adjusted PTC increased 11%, supported by rate orders, new renewable projects, and lower DPL interest expense.
- South America revenue declined 9% and operating margin declined 14%, primarily due to lower generation and prices in Argentina and Chile, adverse foreign exchange, and lower contracted sales.
- MCAC revenue increased 9%, while operating margin declined 9% because of the Changuinola tunnel outage and weaker Panama hydrology. Adjusted PTC increased 22%, aided by insurance recoveries and the Colon combined-cycle facility.
- Eurasia revenue declined 17% and operating margin declined 17%, reflecting the sale of Masinloc and the United Kingdom businesses, as well as lower affiliate results.
Debt, liquidity and cash flow
- Total gross debt was approximately $20.4 billion at year-end, comprising approximately $16.7 billion of non-recourse debt and $3.4 billion of recourse debt.
- Non-recourse debt increased from $15.6 billion at year-end 2018 to $16.7 billion at year-end 2019, while recourse debt declined from $3.7 billion to $3.4 billion.
- Parent Company liquidity was $814 million, consisting of $13 million of parent and qualified holding-company cash and $801 million of available borrowings under parent credit facilities.
- Unrestricted cash and cash equivalents were approximately $1.0 billion; short-term investments were $400 million and restricted cash and debt-service reserves totaled $543 million.
- Parent Company guarantees and commitments, letters of credit, and asset-sale indemnities totaled approximately $1.226 billion.
- Cash used in investing activities was $2.721 billion, driven by capital expenditures, acquisitions, equity-affiliate funding, and lower asset-sale proceeds than in 2018.
- Cash used in financing activities was $86 million. AES issued $5.828 billion of non-recourse debt and repaid $4.831 billion.
- Debt classified as current due to subsidiary technical defaults totaled approximately $325 million, principally at AES Puerto Rico and AES Ilumina. The filing states these were not payment defaults.
Material changes versus the prior comparable period
- GAAP earnings declined sharply because 2018 included substantial gains on the sales of Masinloc, CTNG, Electrica Santiago, and Eletropaulo. 2019 included only $28 million of gains on disposal and sale of business interests versus $984 million in 2018.
- 2019 included $185 million of asset impairment expense, including $115 million related to Kilroot and Ballylumford and $60 million related to the Hawaii coal-fired asset.
- Equity-method results changed from $39 million of earnings in 2018 to a $172 million loss in 2019, including a $158 million impairment at Guacolda and a $92 million other-than-temporary impairment at OPGC.
- Operating cash flow improved despite lower earnings, primarily because of working-capital benefits, including improved collections in the Dominican Republic and insurance receivable collections.
- Capital expenditures increased to $2.405 billion, with higher growth spending on renewables and higher maintenance spending at Andres, DPL, and Changuinola.
- AES completed construction of 2,181 MW of projects, signed long-term PPAs for 2.8 GW, and ended the year with a 6,145 MW backlog, including 3,009 MW under construction and 3,136 MW of renewable capacity under long-term PPAs.
- The Parent Company’s Fitch credit rating was upgraded to investment grade at BBB-, while S&P maintained a BB+ rating with a Positive outlook. Moody’s rating was Ba1.
Guidance, outlook and management commentary
- AES targeted a 50% reduction in carbon intensity by 2022 and a 70% reduction by 2030, relative to a 2016 base. Management also targeted coal-fired generation below 30% of total generation by year-end 2020 and below 10% by 2030.
- Management expected to sign approximately 2 to 3 GW of new PPAs annually through 2022 and planned continued investment in renewables, energy storage, LNG infrastructure, and grid modernization.
- AES reported $100 million of annual run-rate cost savings from digital initiatives expected to be realized by 2022.
- Key projects included the Southland repowering project, Alto Maipo, renewable projects in the United States and Latin America, the Son My LNG and 2.2 GW Son My 2 CCGT projects in Vietnam, and additional LNG capacity in the Dominican Republic.
- Management stated that the carrying values of the Puerto Rico, Chilean coal, and Maritza assets were recoverable as of December 31, 2019, but Gener goodwill of $868 million was considered at risk because its estimated fair value exceeded carrying value by only 3%.
Risks, contingencies and unusual items
- Major risks include high leverage, refinancing and liquidity needs, restrictions on subsidiary distributions, commodity prices, interest rates, foreign exchange, hydrology and weather, power-price volatility, counterparty credit, regulatory changes, environmental compliance, and cyberattacks.
- Argentina remained exposed to severe inflation, currency devaluation, capital controls, regulatory changes, and collection risk. The Argentine peso declined approximately 37% against the U.S. dollar in 2019.
- Chile’s 2019 Stabilization Fund temporarily limited pass-through of regulated energy-price adjustments. AES Gener deferred approximately $30 million of revenue at year-end and expected repayment by December 2027.
- Puerto Rico’s PREPA bankruptcy resulted in approximately $320 million of AES Puerto Rico and AES Ilumina non-recourse debt being classified as current due to technical defaults. Puerto Rico legislation also requires elimination of coal generation by January 2028 unless amended or waived.
- Environmental matters include coal combustion residuals, air and water permits, cooling-water requirements, greenhouse-gas regulation, and notices of violation involving IPL’s Petersburg facility. Potential environmental losses, where estimable, were up to $15 million in aggregate, excluding accrued liabilities.
- Material legal matters include claims involving Alto Maipo, AES Panama land rights, Dominican Republic coal ash, Puerto Rico groundwater, Chilean environmental proceedings, and arbitration against Kazakhstan. Reasonably possible material contingency losses were estimated at $75 million to $503 million, excluding accrued amounts.
- Other unusual 2019 items included $118 million of insurance recovery gains, $36 million of losses on commencement of sales-type leases, $169 million of debt-extinguishment losses, and $67 million of foreign-currency transaction losses.
Most important facts for an investor to verify
- Whether operating cash flow and Adjusted EPS growth are sustainable after excluding insurance recoveries, impairments, disposals, debt-extinguishment costs, and other non-GAAP adjustments.
- The maturity and refinancing profile of approximately $20.4 billion of gross debt, including $1.9 billion of current non-recourse debt and $325 million subject to technical defaults.
- The availability of Parent Company liquidity and the ability of subsidiaries to continue distributing cash despite project-level covenants, regulatory restrictions, and foreign-exchange controls.
- The recoverability of Gener’s $868 million goodwill balance and other coal-related assets as decarbonization policies, power prices, and contract expirations evolve.
- The financial impact and timing of the Chilean Stabilization Fund, Argentine regulatory changes, Puerto Rico’s PREPA restructuring, and DP&L’s rate proceedings.
- Potential costs from environmental compliance, coal-ash remediation, litigation, and regulatory proceedings, including the disclosed $75 million to $503 million range of reasonably possible material contingency losses.
- Execution, financing, permitting, and commercial viability of the renewable, storage, LNG, Southland repowering, Alto Maipo, and Vietnam projects.